Heads in the cloud

Experts share why leveraging cloud-based lending is one way to compete more effectively with fintech lenders.

By Colleen Morrison

If you ask community bankers what word comes to mind when they hear “competition” as it relates to their lending portfolios, the resulting cloud of words centers on one term: fintech. Financial technology companies offer a perfect storm of loan strengths—technological prowess, user-experience knowledge and venture capital funding—that shakes the industry’s foundations.

It’s the collision of this perfect storm with another cloud—the cloud—that sheds light on lending opportunities. The cloud offers advantages for community banks, particularly as they look to revamp the lending experience for customers.

But how? What exactly is the cloud, and what can it do for community bank lending?

Defining the cloud
The cloud, by nature of its virtual existence, is somewhat of an enigma. It refers to a way of storing and assessing data and programs over the internet as opposed to using a single, physical server location. The cloud, essentially, is a network of servers. For financial institutions, that may mean working with a third-party processor or directly with a provider that stores information in the cloud versus in a traditional on-site server.

Community bankers must also scrutinize how regulators talk about the cloud. In its guidance on cloud computing, the Federal Financial Institutions Examination Council (FFIEC) defines it as “a migration from owned resources to shared resources in which client users receive information technology services, on demand, from third-party service providers via the internet ‘cloud.’”

No matter the specific nomenclature used to explain cloud-based solutions, they have become prevalent in today’s financial services marketplace, offering community banks a new option for supporting customers’ lending needs.

Cloud-based lending
Cloud-based environments create efficiencies for financial institutions, lessening infrastructure needs, decreasing costs and increasing effectiveness. In addition, cloud-based platforms enhance the flexibility of the customer interface. In lending, that can be a critical component of whether a customer comes to a community bank or chooses another provider.

“In general, the delivery of the experience matters,” says John Waupsh, chief innovation officer at Kasasa, a financial technology and marketing services company. “Today the competitive set has increased such a dramatic degree, and consumer expectation increases [with it]. We’ve had a decade-plus of wonderful experiences outside of banking, and in the last five years, there’s been an explosion of [financial services] competitors who are offering a nice way to do something. They have been conditioning your consumers [as to] the way businesses should operate.”

This change in consumer expectations can put banks at a disadvantage when it comes to lending. Cloud-based infrastructure can support banks in getting up to speed quickly. In fact, a November 2016 PwC report predicted, “All financial services firms will evaluate a move to a public cloud infrastructure as a ‘when, not if’ part of IT strategy.”

Moving to the cloud in a lending environment expedites the loan process and allows it to move online in a more frictionless manner than the traditional paper-driven process. Using the cloud for the back-end infrastructure enables more robust functionality on the front end.

“You are automating process, and everyone has a better experience, including your customer relations and operations staff,” says Terry Renoux, group president of lending solutions at financial service provider ProfitStars. “I think that’s key. You don’t do cloud-based lending to change the dynamic of what you’re doing, but you do install cloud-based product lending to make your process more effective and efficient and meet borrower expectations.”

In addition to a better customer experience, cloud-based lending has a bottom-line impact for financial institutions. From decreased infrastructure costs to increased reach, it extends the potential for community bank loans.

“A financial institution of around $40 billion reported [that] cloud-based, online activities have allowed it to grow at a rate of 15 percent each year for the past three years, without adding staff,” Renoux reports.

These revenue benefits grow when banks consider the potential for customer acquisitions. Quicker cloud-based credit-approval processes attract more loan applicants.

According to the PwC report, “Some models leverage the computing power of the cloud environment and can return rates and terms in as little as 20 seconds. … Select marketplace lenders [fintech] see turndown rates of approximately 95 percent due to the volume of incoming applications. This stands in contrast to the approximately 5 percent growth in unsecured lending at larger banks so far in 2016.”

Up, up and away?
For many community banks, the benefits of cloud-based lending outweigh the risks, and they are looking for partners to transition their infrastructure. Effective vendor selection and onboarding remains key to selecting a proven partner. In addition, banks should conduct stringent reviews of vendors’ data security approaches. (See sidebar, “Securing the intangible.”)

“Throw a wide net and look at three to four systems in detail,” Renoux advises. “Ensure you are not just looking at the shiny penny and really dig into how it works and the tech providers’ references.”

“All we’re doing is the thing we’ve always done: building processes and procedures around our customers’ needs.”
—John Waupsh, Kasasa

From a 30,000-foot view, cloud-based lending simply creates a new option to compete with fintechs and others when it comes to the customer experience. Supporting customers’ needs and desires remains a fundamental strength of community banks.

“All we’re doing is the thing we’ve always done: building processes and procedures around our customers’ needs,” Waupsh says. “Focus on what their need is and deliver it, and you have to deliver now. The speed of change is fast, so focus on what they need and deliver it [quickly].”

As community banks respond to evolving demands, they will look to drive new services, increase revenue and enhance efficiencies by keeping their heads in the cloud and feet firmly planted on the ground.

Securing the intangible

Despite the resounding benefits of moving to a cloud-based lending infrastructure, there are inherent security risks due to the relinquishing of control around sensitive data.

So how do community banks ensure their cloud-based information remains secure?

The FFIEC recommends that financial institutions working in cloud computing consider “vendor management, information security, audits, legal and regulatory compliance and business continuity planning” as “key elements of sound risk-management and risk-mitigation controls for cloud computing.”

In addition, community banks that make the move to cloud-based environments must confirm their solution providers offer:

  • strong encryption of data, both data at rest and in transit
  • robust firewalls with consistent updates
  • anti-virus software for local computers
  • operating system patches
  • physical security around the servers themselves
  • user management and audits to ensure limited access to systems.

“It all boils down to encryption,” says Terry Renoux of ProfitStars. “It’s so important that you are dealing with a provider that has adequate controls, physical security, user management, audits and the proper disaster-recovery capabilities at the very top of the house.”

Colleen Morrison is a writer in Virginia.